Military Families: Selling a Home You Turned Into a Rental
Military families often have to move because of PCS orders. Instead of selling their home, many choose to rent it out and sell it years later.
If this happened to you, there is good news: you may still qualify for the home-sale tax exclusion, even if the property was a rental when you sold it.
The special military rule
Normally, you must have lived in the home for at least 2 of the 5 years before the sale to qualify for the home-sale exclusion.
Military members have a special exception. If you are away on qualifying military duty, you may be able to pause that 5-year period for up to 10 years.
This can allow you to exclude up to:
$250,000 of gain if single
$500,000 of gain for qualifying married couples filing jointly
Generally, qualifying duty means active duty for more than 90 days or an indefinite period while stationed at least 50 miles from the home or living in government housing under orders.
What if you rented the home after moving out?
Renting your former home does not automatically make you lose the exclusion.
If you lived in the home first and rented it after you moved out, special rules may allow you to exclude more of the gain than you might expect.
This is especially important for military families who have rented their former homes for several years because of military moves.
What about depreciation?
This is the part that generally remains taxable.
While your home was a rental, you may have claimed depreciation. When you sell, the gain related to that depreciation generally cannot be covered by the home-sale exclusion.
This can apply even if you were entitled to depreciation but did not actually claim it.
How is the sale reported?
If the property was still a rental when you sold it, it is generally reported as the sale of rental property, commonly using Form 4797. Other capital-gain forms may also be required depending on the situation.
The home-sale exclusion is then applied to the portion of the gain that qualifies.
Before you file
The dates matter. Keep records showing:
When you bought the home → when you lived there → when you moved out → when you started renting it → your military-duty dates → when you sold it.
Also keep your rental depreciation records and records of major improvements.
Bottom line
A home can be a rental when you sell it and still qualify for the home-sale exclusion.
The special military rules can preserve this valuable tax break for years after you move away. However, depreciation and the exact timing of your military service and rental period can change the final tax result.
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